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Key Terms
– scarcity
– labor
– economics
– entrepreneur
– need
– production
– want
– Gross
– factors of
– land
– capital
– financial capital
The Fundamental Economic Problem
• The fundamental economic
problem facing all societies is
that of scarcity.
• Scarcity is the condition that
results from society not having
enough resources to produce all
the things people would like to
The Fundamental Economic Problem
• Scarcity affects
almost every decision
we make.
• Economics is the
study of how people
try to satisfy what
appears to be
seemingly unlimited
and competing wants
through the careful
use of relatively
scarce resources.
Needs and Wants
• Economists often talk about
people’s needs and wants.
– A need is a basic requirement for
survival and includes food,
clothing, and shelter.
– A want is a way of expressing a
“There Is No Such Thing as
a Free Lunch”
• Virtually everything we do has a cost–
even when it seems as if we are getting
something “for free.”
Most things in life are not free because
someone has to pay for the production
in the first place.
Three Basic Questions
Click the mouse button or press the Space Bar
to display the information.
WHAT to Produce
A society cannot have everything its people
want, so it must decide WHAT to produce.
HOW to Produce
Should factory owners use mass production
methods that require a lot of equipment and
few workers, or should they use less
equipment and more workers?
FOR WHOM to Produce
• After a society decides WHAT and HOW
to produce, the things produced must be
allocated to someone.
The Factors of Production
The reason people cannot satisfy all their
wants and needs is the scarcity of
productive resources.
• The factors of production:
• Land (raw materials)
• Capital
• Labor
• Entrepreneurs.
The Factors of Production (cont.)
All four factors of production are required if
goods and services are to be produced.
• In economics, land refers to the “gifts of
nature,” or natural resources not created by
• Economists tend to think of land as being
fixed, or in limited supply.
• Because the supply of a productive factor
like land is relatively fixed, the problem of
scarcity is likely to become worse as
population grows in the future.
• Another factor of production is capital–
the tools, equipment, machinery, and
factories used in the production of goods
and services.
• aka Capital Goods.
• Financial capital, the money used to
buy the tools and equipment used in
Labor–people with all their efforts,
abilities, and skills.
• This category includes all people
except for entrepreneurs.
• Unlike land, labor is a resource that
may vary in size over time.
Entrepreneur, a risk-taker in search of
profits who does something new with
existing resources.
Some people are special because they are
the innovators responsible for much of the
change in our economy.
• They provide the initiative that combines
the resources of land, labor, and capital
into new products.
• When all factors of production are present,
production, or the process of creating goods
and services, can take place.
The Gross Domestic Product (GDP) is the
most comprehensive measure of a country’s
total output and is a key measure of the
nation’s economic health.